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The challenge of recognizing value

The potential for value creation is a central driver of the high-risk, high-reward biotechnology business model. Historically, the companies that succeed in bringing breakthrough products to market — and the investors who back them — have reaped handsome returns. In doing so, these biotechs transition from creating value to capturing it — generating revenues and earning profits.

The engine driving this value capture is R&D — the years-long process of identifying and testing via sequential clinical trials. As a product journeys from the laboratory to the marketplace, there are discrete events — for instance, completed phases of clinical trials and strategic alliances — at which key stakeholders step up or down its valuation and/or the valuation of its developer. These inflection points are critical for both companies and their backers, since value can only be captured if it is recognized and rewarded by others.

Never has biotech’s agility been more important than now, as the current challenges facing the industry are more persistent and consequential than in decades past

Financial investors, strategic partners, regulators and payers all play a role in measuring a biotech product’s value. However, there is a disconnect between the creation of value by a biotech company and the timing and extent to which this value is acknowledged by other parties.

Traditional drug development methods and business models at least partially account for this lag in value recognition. Recent trends, such as slower market launches and milestone-driven deal structures, exacerbate the issue.

Value leakages in R&D

R&D remains a central — if not the central — point of value leakage for biopharmaceutical companies. Doubling down on R&D hasn’t resulted in drug launches that exceed — or even meet — investor expectations.

Too many drugs fail in Phase III, where R&D spend is highest

Source: EY, Sagient Research Systems and BIO. Probability of failure was assessed for each stage of drug development, as well as for the entire process (from Phase I to approval).

Three approaches for unlocking value

The discussion above raises four questions with respect to unlocking value:

How can value be made more transparent for stakeholders, allowing them to recognize value in more timely ways?

How can biotech companies recapture some of the value they gave away in recent years because of market pressures?

Are there approaches that allow companies to unlock value by simultaneously focusing on both matters of efficiency and matters of evidence?

How can capital be used more efficiently in clinical trials, allowing companies’ resources to be deployed in ways that create the most value?

To provide potential answers to these questions, we focus on three strategies:

Adaptive clinical trials – The traditional three-phase clinical trial system creates few learning opportunities. It results in R&D funds being tied up for an average of three years and viewed as a sunk cost that is only reexamined as the drug advances to the next phase. Adaptive trial designs enable biotech companies to refine their hypotheses and reallocate R&D dollars in real time based on data generated in the clinic.

Precompetitive collaborations – Cross-industry collaborations solve industry-wide problems, such as developing standards for capturing real-world data, and have flourished in the last few years. While participation in these efforts requires the commitment of resources, including capital and senior leadership time, it can minimize the precious resources wasted on common challenges.

These three approaches, which can work in tandem and mutually reinforce each other, provide answers to the challenge of unlocking value by pushing different levers.

They reduce R&D risk by improving the probability of success. They decrease the amount of capital committed to R&D, especially clinical trials. They shorten the time of clinical development so products reach the market and achieve peak sales faster. And they help increase sales of products. In sum, these strategies allow companies to winnow the funnel of R&D candidates to avoid the high attrition rate that currently pervades late-stage drug development.

Comparing a traditional clinical trial to an adaptive design

Source: EY. R&D costs were modeled for a traditional Phase II-Phase III design and an adaptive Phase II/III including two interim analyses for early success or early termination. EY modeled monthly development costs and sales for both trial designs to calculate an adjusted NPV.

New capabilities required

It is time for biotech companies, regardless of their size, stage of development or disease focus, to recalibrate their R&D organizations to unlock and capture more value from their drug development efforts. We offer four guiding principles:

Partner early and often

Empower senior R&D leadership

Participate in precompetitive consortia

Prioritize evidence collection initiatives early on

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